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When Stocks Go On Sale Thumbnail

When Stocks Go On Sale

Mike Earl, CFP®, CPWA®

Market downturns are painful. It’s distressing to open your account statement and see the declines. But as so many of our successful clients remind themselves, “It’s not a loss unless you sell out.” 

Between September 28th and Christmas Eve 2019, the S&P 500 declined by 19.3%. Small-and-mid-sized US companies were hit even harder, declining by 25.1% during that same period. What caused these declines? The headlines attempt to pinpoint specific reasons for the declines – with talk of tariffs and trade wars with China, Fed rate hikes, a government shutdown, and computerized trading behind the scenes. There is never just one reason for stock market declines. We believe what was unique about the recent declines is the fundamental forces driving markets were actually quite strong:

  • US corporations are earning record profits (21% growth in 2018), and those profits are forecasted to continue rising in 2019 (high single digit earnings growth expected). 

  • The unemployment rate has still been falling in the US (currently at 3.7%). 

  • Interest rates are still quite low from a historical perspective, with the 10-year Treasury yielding 2.70% as of this writing. 

  • Industrial production, retail sales, and personal incomes are all moving higher.

  • GDP growth is still respectable in the US, with estimates for 2019 ranging from 2-3% growth.

  • Between rising earnings and declining stock prices, forward valuations on stocks are below their long-term average.

  • We think all of these signs firmly point toward the US still being in expansion mode, with no recession looming on the near-term horizon. While fundamentals can change quickly, no significant threat looms.

In times like these, it’s challenging to maintain a long-term approach to investing. For some people, the temptation to hop online and check their portfolio value is a daily battle. We encourage our clients to step back and remember the big picture: over the long term, stocks historically have been one of the best investments for outpacing inflation.

This is a hypothetical example for illustration purposes only and does not represent an actual investment.

Source: MFS Investment Research

Declines are a regrettable but necessary part of investing in stocks. There is no free lunch. We can’t share in the bountiful rewards of stock investing without sharing in the sometimes vicious declines. The volatility of stocks is not something new:

  • Market declines greater than 10% happen on average once per year.

  • Daily declines of 2% happen on average 5 times per year.

  • Markets are positive nearly 3/4 years.

The best way to think of stock market declines is like a sale on stocks. It’s a cleanse and a chance for the stock market to reboot to higher highs — we have always done that, historically. Our country has shown tremendous innovation and resiliency throughout its illustrious history, and the productivity of our people has led the stock market higher and higher over history. 

As productivity increases, companies make more money – and earnings are what ultimately drives the markets higher. If you believe all of the innovation and productivity will forever cease, then yes, maybe you would be tempted to give up on owning stocks. But if the world isn’t going to end anytime soon, then stocks very well may eventually plow ahead higher.

For our retired clients: times like these illustrate precisely why we own bonds. During the abysmal 4th quarter for stocks, bond returns were positive. Every retired client has anywhere from 5-10 years’ worth of withdrawals held in stable bonds that we use to avoid needing to sell stocks at depressed prices.

For our clients in accumulation mode (still saving for retirement): you are buying stocks at a significant discount relative to just a few short months ago!  We believe you should be looking to add more in 2019 to your portfolio than you ever have before. 

Should we make changes to our portfolio? Have your goals changed? With The Wealth Group, you have a financial plan for your future. Your plan builds in the inevitable declines we will see over time in stocks. If your plan hasn’t changed, then your portfolio does not need change.

The global stock markets are made up of hundreds of millions of investors (i.e. people), and people are emotional. We can’t control markets, but there are plenty of things we can control: how much we save and invest; how quickly we pay off debt; tax efficiency; diversifying our portfolio; and having a financial plan to achieve our goals.

Now is the time to tune out the noise, stop checking your portfolio, and focus on your goals for 2019.


1)      MFS Research

2)      JPMorgan

3)      First Trust Economics Blog

4)      Doug Short

Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions. 

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 

Investments mentioned may not be suitable for all investors.